Level Playing Field
In this month’s article in the series from members of the Automated Material Handling Systems Association (AMHSA), David Hayward-Browne, Director of Logistics Planning Consultants International (LPC), explains how the process of acquiring automation can affect system selection.
When fitting out a warehouse and considering a mechanised or automated handling system as an alternative to a more conventional operation, the objective is always to achieve the optimal solution. However, the process of obtaining quotations, comparing the differing solutions and determining the optimal offer can affect the outcome. Any shortcomings in the process tend to have greater effect when comparing options involving differing levels of technology or complexity.
Tender conditions
The tender conditions are a key part of the process – how you frame the tender in terms of what you ask for and when you ask for it impacts the answers you get. The first point to consider is how much time is allowed for the tender response. If the tender is large or complex, sufficient time should be allowed for the design work to enable the solution to be developed and costed accurately. Many suppliers are integrators of equipment from other companies as well as their own factories; they require sufficient time to complete the design and seek quotations. If time is short and the integrator cannot get fixed prices, cost estimates will be used. This will lead to an analysis of the risk involved, which in turn will be factored into the contingencies allowed, leading to higher prices in the tender return. If time is tight, it can be helpful to conduct a pre-tender exercise to ascertain the willingness of suppliers to bid and their capability to meet the programme, including the tender process.
Investment payback times
When reviewing the potential solutions, the expected life of the investment should be considered. An automated system will generally have a longer life than forklift-based systems. A company policy to depreciate/write off equipment over a standard period of, say, eight years will favour conventional, less capital-intensive solutions over automated systems – which, when a whole life cost is considered, can deliver greater savings. As a general rule, conveyors and sorters can be expected to last 20 to 25 years. Cranes can last 25 to 30 years, though it should be noted that control systems generally require upgrading earlier.
3PLs
The procurement of equipment can be complicated enough when only a client and a supplier are involved. However, when an operation is outsourced to a third-party logistics provider (3PL), there is another party and their interests to consider. If 3PLs are bidding for an outsourcing contract that includes the provision of a facility and fit-out, the type of solution will be affected by the length of the 3PL’s contract. Shorter contracts of 3 to 5 years favour lower capital and/or leased equipment solutions. These are typically conventional solutions with higher operating costs. The option to reduce the operating costs by investment in automation is not possible if the 3PL cannot achieve a return on the investment within the life of such a short contract. There is therefore a danger that a higher level of operating cost is built into an operation than could be achieved. An alternative to having a longer contract with a 3PL is for the client to procure the facility and fit it out and only tender the operation to a 3PL.
The challenge of assumptions
There will be a number of assumptions implicit in selecting the best solution. Some of these assumptions are applicable at the point of delivery or implementation – such as whether the floor and sub-structure are capable of supporting the loads applied by the preferred solution – and can be quantified and dealt with. Others are longer term and may have an asymmetric effect on the various potential options if they include different levels of technology and automation. A prime example of this is the cost and availability of labour. Higher labour costs and/or lack of supply in the labour market will have more impact on a conventional system, which typically has a higher manning level, than an automated system. These longer term assumptions are difficult to deal with, but should be considered given the typical life of an automated system is more than 15 years.
This article was originally published in ShD (Storage Handling Distribution) magazine in December 2011.